On June 17, 2024, the Treasury Department launched “a new regulatory initiative to close a major tax loophole exploited by large, complex partnerships.”[1] The loophole: partnership basis-shifting transactions.

In these transactions, a single business that operates through many different legal entities . . . enters into a set of transactions that manipulate partnership tax rules to maximize tax deductions and minimize tax liability. . . . For example, a partnership might shift tax basis from property that does not generate tax deductions (such as stock or land) to property that does (such as equipment). Taxpayers may also use these techniques to depreciate the same asset over and over.[2]

Treasury claims that such “transactions defy congressional intent to avoid tax liability with little to no other economic consequences for the participating businesses.”[3]

To try to fight this problem, the Treasury is issuing Notice 2024-54, announcing its intent to publish proposed regulations to eliminate the tax benefit from these transactions, Proposed Regulation 1.6011-18, which would require taxpayers and their material advisers to report their participation in partnership basis-shifting transactions, and Revenue Ruling 2024-14, which finds that certain partnership basis-shifting transactions lack economic substance and will not be respected.

Treasury believes that this initiative could raise more than $50 billion in tax revenue the next 10 years.[4] These moves come as the Internal Revenue Service has been increasing audit activity involving partnerships after years of such efforts being “severely underfunded.”[5]

[1] U.S. Department of the Treasury, IRS Announce New Initiative to Close Loopholes, Ensure Wealthiest Taxpayers Pay What They Owe, https://home.treasury.gov/news/press-releases/jy2408 (June 17, 2024).

[2] Id.

[3] Id.

[4] Id.

[5] See id.; Internal Revenue Service, IRS Announces New Steps to Combat Abusive Use of Partnerships; Agency’s Focus Intensifies as New Guidance Closes Loopholes Worth Tens of Billions, https://www.irs.gov/newsroom/irs-announces-new-steps-to-combat-abusive-use-of-partnerships-agencys-focus-intensifies-as-new-guidance-closes-loopholes-worth-tens-of-billions (June 17, 2024).

Have a question? Contact TL Fahring.